Friday , May 26 2017
Home / Pater Tenebrarum
Pater Tenebrarum

Pater Tenebrarum

Pater Tenebrarum is an independent analyst and economist/social theorist. He has been involved with financial markets in various capacities for 39 years and currently writes economic and market analyses for independent research organizations and a European hedge fund consultancy as well as being the main author of the acting-man blog.

Articles by Pater Tenebrarum

A Cloud Hangs Over the Oil Sector

12 days ago

Endangered Recovery
As we noted in a recent corporate debt update on occasion of the troubles Neiman-Marcus finds itself in (see “Cracks in Ponzi Finance Land”), problems are set to emerge among high-yield borrowers in the US retail sector this year. This happens just as similar problems among low-rated borrowers in the oil sector were mitigated by the rally in oil prices since early 2016. The recovery in the oil sector seems increasingly endangered though.

Too many oil barrels are filling up again. Photo credit: Kay Nietfeld / DPA / Corbis – Click to enlarge
Here is a chart we have frequently shown in the past, which illustrates the y/y change rate in commercial & industrial loan charge-offs plus delinquencies in comparison to junk bond yields (the federal funds rate is added for good measure):

.
To avoid misinterpretations of this chart, note that the big surge in the rate of change of charge-offs/delinquencies obviously started from very low levels. In absolute terms it came nowhere near to the levels that were seen in 2008 – 2009. Both the increase in charge-offs and delinquencies and the improvement over recent quarters closely tracked the problems and subsequent recovery in the oil & gas sector as the oil price plunged from late 2014 to early 2016 and then rebounded.

Read More »

The Triumph of Hope over Experience

14 days ago

The Guessers Convocation
On Wednesday the socialist central planning agency that has bedeviled the market economy for more than a century held one of its regular meetings.  Thereafter it informed us about its reading of the bird entrails via statement (one could call this a verbose form of groping in the dark).
A number of people have wondered why the Fed seems so uncommonly eager all of a sudden to keep hiking rates in spite of economic data in Q1 indicating surprising weakness in   economic output (of course they once again didn’t hike rates, this time).
We have long suspected that the real reason for the urge to hike is to accumulate “ammunition” for the next downturn. After all, it really shouldn’t make much of a difference where the federal funds rate is; the federal funds market is basically dead anyway, and the Fed continues to refrain from shrinking its balance sheet (i.e., bank reserves will remain elevated, and the Fed won’t actively exert pressure on money supply growth).

Modern economic forecasting rituals. – Click to enlarge
Then again, the statement is actually in keeping with the orthodox (largely Keynesian) view of the economy and the central bank’s presumed tasks. There is actually no need to take it at anything but face value.

Read More »

Emerging Markets: Buyer Beware – An Interview with Jayant Bhandari

19 days ago

Jayant on Emerging Markets, Precious Metals and Mining Companies
Maurice Jackson of Proven & Probable has once again interviewed one of our friends, namely Jayant Bhandari, a frequent and highly valued contributor to Acting Man.  Jayant is probably best known to our readers for his strong criticism of the economic and nationalist policies implemented by prime minister Narendra Modi in India since he decreed the demonetization of the bulk of the cash currency circulating in the country (see his most recent article here).

Jayant Bhandari speaking at the 2016 Capitalism and Morality seminar. – Click to enlarge
It is probably fair to say that Jayant is a lone contrarian voice in India at the moment, but we believe a very important one. In the process, he is not shying away from slaughtering a great many sacred cows, so too speak. Taking a stand against a misguided majority and a ruthless political machinery is risky, but at times someone has to stand up and do it. As an aside to this, we find it quite interesting that Mr. Modi, who is clearly a “populist”, is apparently beloved by a a great many globalists, who praise him to the rafters at every opportunity.

Read More »

Cracks in Ponzi-Finance Land

29 days ago

Retail Debt Debacles
The retail sector has replaced the oil sector in a sense, and not in a good way. It is the sector that is most likely to see a large surge in bankruptcies this year. Junk bonds issued by retailers are performing dismally, and within the group the bonds of companies that were subject to leveraged buyouts by private equity firms seem to be doing the worst (a function of their outsized debt loads). Here is a chart showing the y-t-d performance of a number of these bonds as of the end of March:

Note the stand-out Neiman Marcus, a luxury apparel retailer, the bonds of which have been in free-fall this year. The company was bought out in an LBO and was saddled with a mountain of debt in the process. Investors buying this debt have now come to regret their purchases, particularly as it is debt of the “creative” kind.
Investor demand for junk bonds continues to be brisk, with inflows from retail investors said to be particularly strong. As we have pointed out on previous occasions, this surge in demand has resulted in creditors accepting ever softer loan covenants.

Read More »

French Selection Ritual, Round Two

April 26, 2017

Slightly Premature Victory Laps
The nightmare of nightmares of the globalist elites and France’s political establishment has been avoided: as the polls had indicated, Emmanuel Macron and Marine Le Pen are moving on to the run-off election; Jean-Luc Mélenchon’s late surge in popularity did not suffice to make him a contender – it did however push the established Socialist Party deeper into the dustbin of history. That was very Trotskyist of him (we can already picture a future Weekly World News headline: “French socialists discover giant alien dust mites”).

Lateral entrants to the business of avenging the disinherited, leavened by strawberry cake. – Click to enlarge
Around three micro-seconds after the election results became known, the entire French and European political elite immediately announced its undying support of Emmanuel Macron, with only a handful of “populist” parties outside of France saying that they were rooting for Marine Le Pen.
Just to clear this up beforehand, Ms. Le Pen may be the terror of the establishment, but she is just as statist as her competition was and is – in some respects probably more so. The run-off election is between two central planners (or at least “third way” proponents), each one of whom believes to be in possession of the “better plan”.

Read More »

French Election – Bad Dream Intrusion

April 19, 2017

The “Nightmare Option”
The French presidential election was temporarily relegated to the back-pages following the US strike on Syria, but a few days ago, the Economist Magazine returned to the topic, noting that a potential “nightmare option” has suddenly come into view. In recent months certainty had increased that once the election moved into its second round, it would be plain sailing for whichever establishment candidate Ms. Le Pen was going to face. That certainty has been shaken quite a bit lately.

The four front-runners in the first round election, from left to right: François Fillon, Emmanuel Macron, Jean-Luc Mélenchon, Marine Le Pen. That’s right, Mr. Mélenchon, a.k.a. the “French Hugo Chavez” has actually become a serious contender. If you want to know how abysmally bad his economic program is, just consider that Thomas Piketty supports him.

Photo credit: Patrick Kovarik / AFP – Click to enlarge
Apparently French voters were greatly impressed by far-left candidate Jean-Luc Mélenchon, who on occasion of the second televised debate once again proved his ability to out-gab his competitors.

Read More »

Gold – An Overview of Macroeconomic Price Drivers

April 13, 2017

Fundamental Analysis of Gold
As we often point out in these pages, even though gold is currently not the generally used medium of exchange, its monetary characteristics continue to be the main basis for its valuation. Thus, analysis of the gold market requires a different approach from that employed in the analysis of industrial commodities (or more generally, goods that are primarily bought and sold for their use value). Gold’s extremely high stock-to-flow ratio and the main source of gold demand  – which is monetary, or investment demand – suggest that gold has to be analyzed as though it were a currency rather than a commodity.
One implication of this is that reservation demand is an extremely important factor in determining the gold price (for details on this topic see Robert Blumen’s essay “What Determines the Price of Gold”). Data on the annual flow of gold in terms of mining supply, jewelry demand, retail buying of gold eagles or net demand from central banks are insignificant by comparison.
Since none of us are mind readers, we cannot know the reservation prices/ supply schedules of current gold holders – they are not measurable.

Read More »

Strange Moves in Gold, Federal Reserve Policy and Fundamentals

April 7, 2017

Counterintuitive Moves
Something odd happened late in the day in Wednesday’s trading session, which prompted a number of people to mail in comments or ask a question or two. Since we have discussed this issue previously, we decided this was a good opportunity to briefly elaborate on the topic again in these pages.
A strong ADP jobs report for March was released on Wednesday, and the gold price dutifully declined ahead of it already, while the stock market surged concurrently. Later in the day, the Fed minutes were published, and their tone was definitely seen as very “hawkish”, at least by today’s standards.

Strange happenings alert!
There was quite a bit of talk about rate hikes and  – gasp! – even about ending reinvestment of funds the Fed receives when debt securities in its QE portfolio mature. The merry pranksters also bemoaned the egregious bubble their own policies have given birth to.
According to Reuters:
“Most Federal Reserve policymakers think the U.S. central bank should take steps to begin trimming its $4.5 trillion balance sheet this year as long as the economic data holds up, Fed meeting minutes showed.
The minutes also showed “some participants viewed equity prices as quite high relative to standard valuation measures.

Read More »

LIBOR Pains

April 1, 2017

Wrong Focus
If one searches for news on LIBOR (=London Interbank Offered Rate, i.e., the rate at which banks lend dollars to each other in the euro-dollar market), they are currently dominated by Deutsche Bank getting slapped with a total fine of $775 million for the part it played in manipulating the benchmark rate in collusion with other banks (fine for one count of wire fraud: US$150 m.; additional shakedown by US Justice Department: US$625 m., the price tag for a deferred prosecution agreement).

.
Bad, but not deadly for the wobbling banking giant. There is a far more important fact to focus on though – namely what LIBOR has actually done lately. Let us take a look:

London Interbank Offered Rate – 3 Months, April 2016 – 2017Since mid 2015, 3 month LIBOR has soared from a low of approx 22.5 basis points to its current level of 115 basis points – i.e., it is now more than 5 times higher than two years ago. The “ouch” is explained further below. – Click to enlarge
The initial surge in LIBOR was due to a combination of the Fed finally hiking rates and new rules for US money market funds taking shape, which were rightly expected to starve European banks of a major source of dollar funding.

Read More »

Price Inflation – The Ultimate Contrarian Bet

March 29, 2017

Unanimity Syndrome
If there is one thing apparently no-one believes to be possible, it is a resurgence of consumer price inflation. Actually, we are not expecting it to happen either. If one compares various “inflation” data published by the government, it seems clear that the recent surge in headline inflation was largely an effect of the rally in oil prices from their early 2016 low. Since the rally in oil prices has stalled and may well be about to reverse, there seems to be no obvious reason to expect the increase in CPI to continue, or heaven forbid, to accelerate.

Buying an egg in Berlin, circa early 1923.

Photo credit: DPA – Click to enlarge
So-called “inflation expectations” – which really means expectations about the future rate of change of CPI – have certainly risen following the US election, in expectation of a Trumpian spending spree and the possibility that higher tariffs might be imposed. This is to say, they have surged in terms of certain market indicators, such as inflation breakevens and forwards. Moreover, bond yields have certainly risen as well – as we expected them to do, since oil price-related base effects were bound to boost CPI (as we mentioned several times in these pages).

Read More »

Gold Sector: Positioning and Sentiment

March 17, 2017

A Case of Botched Timing, But…
When last we wrote about the gold sector in mid February, we discussed historical patterns in the HUI following breaches of its 200-day moving average from below. Given that we expected such a breach to occur relatively soon, the post turned out to be rather ill-timed. Luckily we always advise readers that we are not exactly Nostradamus (occasionally our timing is a bit better). Below is a chart of the HUI Index depicting the action since the January 2016 bear market low, with lateral support/resistance lines relevant to the recent action.
To the above, readers should keep in mind that we are slightly biased, due to our positive long term view on gold (which is based on good reasons as we believe). We obviously underestimated the extent to which the looming rate hike would weigh on the gold market and real rates. The latter are an important fundamental driver of gold and had begun to look increasingly bullish in mid February, but that positive signal fell apart within days of our update (more on this in an upcoming  post on the fundamental drivers of the gold market).
As Quintilianus would probably advise us to say: culpa tota nostra est.

Read More »

Speculative Blow-Offs in Stock Markets – Part 2

March 7, 2017

Blow-Off Pattern Recognition
As noted in Part 1, historically, blow-patterns in stock markets share many characteristics.  One of them is a shifting monetary backdrop, which becomes more hostile just as prices begin to rise at an accelerated pace, the other is the psychological backdrop to the move, which entails growing pressure on the remaining skeptics and helps investors to rationalize their exposure to overvalued markets. In addition to this, the chart patterns of  stock indexes before and after blow-off moves are displaying noteworthy similarities as well.

“On Margin” – a late 1929 cartoon illustrating the widespread obsession with the stock market at the time. There was just a 10% margin requirement, i.e., investors could leverage their capital at a ratio of 10:1. The demand for margin credit was so strong, that it pushed call money lending rates in New York up quite noticeably. This in turn made it increasingly difficult to maintain extremely leveraged positions. – Click to enlarge
Why do we assume the current move is a speculative blow-off and not just another “normal” up-leg? The main reasons are the speed and size of the move, the fact that it happens at the tail end of a very sizable advance that has already lasted a full eight years, the chart pattern, and above all, valuations.

Read More »

Speculative Blow-Offs in Stock Markets – Part 1

March 6, 2017

Defying Expectations
Why is the stock market seemingly so utterly oblivious to the potential dangers and in some respects quite obvious fundamental problems the global economy faces? Why in particular does this happen at a time when valuations are already extremely stretched? Questions along these lines are raised increasingly often by our correspondents lately. One could be smug about it and say “it’s all technical”, but there is more to it than that. It may not be rocket science, but there are a few issues that are probably not getting the attention they deserve.

The stock market has blown widespread expectations out of the water by embarking on a seemingly unstoppable rally since Donald Trump was elected POTUS.

Cartoon by Frank Hanley – Click to enlarge
As you can see below, we have marked “Brexit day” on the chart as well, which was another noteworthy juncture. Not only was the success of the “Leave” campaign just as big a surprise as Trump’s election victory, but it was yet another occasion on which the market ended up fooling most observers by dramatically reversing course after a mere two days of relatively mild panic selling.
Not to belabor the obvious too much, but it is actually a hallmark of bull markets that they ignore any and all bad news.

Read More »

Gold Sector Update – What Stance is Appropriate?

February 26, 2017

The Technical Picture – a Comparison of Antecedents
We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of late. In light of past experience, such market behavior certainly deserves to be scrutinized. We felt reminded of another occasion though, when a negative divergence prompted a flood of mails to us as well (not every divergence does).
As our long-time readers know, we sometimes catch important turns in timely fashion, but we are not exactly Nostradamus. What’s more, we are biased – a bias that results from our understanding of the current monetary and economic backdrop. Anyway, we can definitely not predict the future with certainty. At best, we can offer our interpretation of probabilities and risk-reward scenarios over a range of different time frames. The markets can, and frequently do prove us wrong and you should keep that in mind as you read on.

Read More »

Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections

February 9, 2017

Looming Currency and Liquidity Problems
The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into account.
It has become a tradition to invite a special guest to the board meeting and we were honored to be joined by Paul Mylchreest this time. Most of our readers will probably know Paul as the author of the Thunder Road Report. He currently covers equity and cross-asset strategy for ADM ISI in London.
USD-CNY, the onshore exchange rate of the yuan vs. the USD. After years of relentless appreciation, the yuan topped in early 2014 and has weakened just as relentlessly ever since. The yuan’s top coincided with the beginning of the “tapering” of the Fed’s QE3 debt monetization program and the peak in China’s foreign exchange reserves at just below $4 trillion. There was practically no lead time involved, which is rare.

Read More »

US Financial Markets – Alarm Bells are Ringing

January 18, 2017

A Shift in Expectations
When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump’s election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election result has strongly boosted certain market expectations.

.
The chart below compares three of the associated ETFs, namely SPY, TLT and GLD:
As we have mentioned late last year, US true money supply growth rates have accelerated sharply again. Since the stock market has concurrently broken out to new all time highs, its strength deserves some respect for now, despite the fact that valuations are extremely high. Our assessment is that there will likely be near term weakness, followed by medium term strength and ultimately a long term disaster. The “alarm bells” mentioned in the title of this post refer to the near term outlook.

Read More »

Gold – Ready to Spring Another Surprise

December 29, 2016

Sentiment Extremes
Below is an update of a number of interesting data points related to the gold market. Whether “interesting” will become “meaningful” remains to be seen, as most of gold’s fundamental drivers aren’t yet bullishly aligned. One must keep in mind though that gold is very sensitive with respect to anticipating future developments in market liquidity and the reaction these will elicit from central banks. Often this involves very long lead times.

Blackbeard’s treasure chest. – Click to enlarge
If one looks at long term charts of gold, one can see that meaningful rallies usually start as technical short covering moves, which often are still at odds with at least some of the macroeconomic fundamentals. The starting points of these rallies often involve divergences with associated markets or data points. If the market is too far ahead of itself, these moves will be given back again quickly.
If a meaningful move has indeed begun though, the fundamental drivers will begin to fall into place as it continues, and it will become clear in hindsight that the market has anticipated these developments. It is therefore definitely worthwhile to pay attention to sentiment extremes and inter-market divergences.

Read More »

The Exiling of Risk

December 17, 2016

A Quick Chart Overview
Below is an overview of charts we picked to illustrate the current market situation. The selection is a bit random, but not entirely so. The first set of charts concerns positioning and sentiment. As one would expect, these look fairly stretched at the moment, but there are always ways in which they could become even more stretched. First a look at the NAAIM exposure index:

NAAIM Exposure Index, SPXAt 101.6% net long (responses can range from 200% leveraged short to 200% leveraged long), fund managers taking part in this survey have reached a fairly one-sided extreme. – Click to enlarge
What is even more remarkable than the overall positioning extreme is the fact that there were literally zero bears in the NAAIM survey for the past three weeks. In case you’re wondering, that doesn’t happen very often.
At one point even the most bearish manager was slightly net long. Not too long ago the biggest bears were actually up to 150% net short for quite a while, but their conviction has been destroyed by the post election rally. One cannot blame them, but it is still a case of remarkable unanimity regarding any remaining downside potential.

Read More »

The Climate Changes Back – What Comes Next?

December 13, 2016

Surface Temperatures Plunge – the Great Pause Continues
Last year’s El Nino phenomenon temporarily provided succor to climate alarmists, who were increasingly bothered by the “Great Pause” – the fact that the tiny amount of warming experienced since the last cooling cycle ended in the late 1970s had apparently stopped. Despite trace amounts of CO2 in the atmosphere continuing to climb, mother nature decided to disobey alarmist models and temperatures went sideways for about 20 years (or even longer, depending on the data set).
A raft of excuses was offered for this decidedly non-hockey stick behavior – by November 2014, there were 66 different “explanations” to choose from. So this is what “settled science” looks like: we “just know” that the economy must be burdened with onerous and expensive regulations and smothered in new taxes (including this recently proposed obscenity), in order to avert an allegedly man-made future catastrophe. And just to be safe, “climate deniers” should be jailed or killed. We know the future, but we cannot even explain what has happened in the recent past. As a reminder: not a single alarmist prediction on the climate has come true – it is a forecasting record completely unblemished by success for decades. Not even economists are that bad.

Read More »

The Climate Changes Back – What Comes Next?

December 13, 2016

Surface Temperatures Plunge – the Great Pause Continues
Last year’s El Nino phenomenon temporarily provided succor to climate alarmists, who were increasingly bothered by the “Great Pause” – the fact that the tiny amount of warming experienced since the last cooling cycle ended in the late 1970s had apparently stopped. Despite trace amounts of CO2 in the atmosphere continuing to climb, mother nature decided to disobey alarmist models and temperatures went sideways for about 20 years (or even longer, depending on the data set).
A raft of excuses was offered for this decidedly non-hockey stick behavior – by November 2014, there were 66 different “explanations” to choose from. So this is what “settled science” looks like: we “just know” that the economy must be burdened with onerous and expensive regulations and smothered in new taxes (including this recently proposed obscenity), in order to avert an allegedly man-made future catastrophe. And just to be safe, “climate deniers” should be jailed or killed. We know the future, but we cannot even explain what has happened in the recent past. As a reminder: not a single alarmist prediction on the climate has come true – it is a forecasting record completely unblemished by success for decades. Not even economists are that bad.

Read More »

The Climate Changes Back – What Comes Next?

December 13, 2016

Surface Temperatures Plunge – the Great Pause Continues
Last year’s El Nino phenomenon temporarily provided succor to climate alarmists, who were increasingly bothered by the “Great Pause” – the fact that the tiny amount of warming experienced since the last cooling cycle ended in the late 1970s had apparently stopped. Despite trace amounts of CO2 in the atmosphere continuing to climb, mother nature decided to disobey alarmist models and temperatures went sideways for about 20 years (or even longer, depending on the data set).
A raft of excuses was offered for this decidedly non-hockey stick behavior – by November 2014, there were 66 different “explanations” to choose from. So this is what “settled science” looks like: we “just know” that the economy must be burdened with onerous and expensive regulations and smothered in new taxes (including this recently proposed obscenity), in order to avert an allegedly man-made future catastrophe. And just to be safe, “climate deniers” should be jailed or killed. We know the future, but we cannot even explain what has happened in the recent past. As a reminder: not a single alarmist prediction on the climate has come true – it is a forecasting record completely unblemished by success for decades. Not even economists are that bad.

Read More »

US True Money Supply Growth Jumps, Part 1: A Shift in Liabilities

December 6, 2016

A Very Odd Growth Spurt in the True Money Supply
The growth rates of various “Austrian” measures of the US money supply (such as TMS-2 and money AMS) have accelerated significantly in recent months.  That is quite surprising, as the Fed hasn’t been engaged in QE for quite some time and year-on-year growth in commercial bank credit has actually slowed down rather than accelerating of late. The only exception to this is mortgage lending growth – at least until recently. Growth in mortgage loans is still very slow though, especially compared to historical growth rates. It cannot really account for the recent surge in money supply growth either.
Usually lending by commercial banks will tend to lead growth in the broad true money supply, but this lead-lag relationship has become a lot less straightforward after the 2008 financial crisis (in fact, it actually reversed for a while). As a result of the Fed’s heavy debt monetization activities, the pace of money supply growth is nowadays influenced directly by two major sources.
Prior to the crisis, the Fed would mainly affect commercial bank lending growth by setting overnight interbank lending rates (i.e., the federal funds rate) and maintaining its rate target by supplying or occasionally draining reserves.

Read More »

A Note on Gold and India – What is Driving the Gold Price?

November 29, 2016

Hidden Motives
It is well-known that India’s government wants to coerce its population into “modernizing” its financial behavior and abandoning its traditions. The recent ban on large-denomination banknotes was not only meant to fight corruption.
In fact, as our friend Jayant Bhandari has pointed out, fresh avenues for corruption  immediately opened up upon enactment of the ban (see “Gold Price Skyrockets in India After Currency Ban” – Part 1, Part 2 and Part 3).
It is a nigh apodictic certainty that governments are lying – whether outright or by omission – when they impose such drastic measures. It should be clear how the State operates once one recognizes its true nature and realizes that “we” are definitely not the State.
Thus there are several reasons for the currency ban that have nothing to do with the official justification forwarded by the government. One is of course that the government hopes to be able to confiscate a sizable proportion of the citizenry’s  – allegedly “ill-gotten” – wealth.
A special one-off tax penalty will be imposed on deposits government officials arbitrarily deem “too large” – under the cover that only criminals will be deprived of their possessions, for the benefit of public at large (meaning: Modi’s supporters.

Read More »

The Problem with Corporate Debt

November 26, 2016

Taking Off Like a Rocket
There are actually two problems with corporate debt. One is that there is too much of it… the other is that a lot of it appears to be going sour.
As a brief report at Marketwatch last week (widely ignored as far as we are aware) informs us:
“Businesses racked up debt in the January-to-March period at the fastest pace in three quarters, according to data released Thursday.
Business debt grew at a blistering 7.9% annual rate in the first quarter, the Federal Reserve said. Business debt has expanded by around 8% in three of the last five quarters. Companies still have substantial cash on the sidelines, as their stockpiles edged down to $1.89 trillion from $1.9 trillion.”

Harvey had a good time in recent years…well, not so much between mid 2014 and early 2016, but happy days are here again!

Cartoon by Frank Modell – Click to enlarge
While Marketwatch told us how much cash companies are holding, for some reason it didn’t deign to tell us how much corporate debt there actually is, in dollars and cents.

Read More »

Gold – Eerie Pattern Repetition Revisited

November 16, 2016

Gold Continues to Mimic the 1970s
Ask and ye shall receive… we promised we would update the comparison chart we last showed in late November in an article that kind of insinuated that it might be a good time to buy gold and gold stocks (see: “Gold and Gold Stocks – It Gets Even More Interesting” for the details). We are hereby delivering on that promise.

A Lydian gold stater from the time of the famously rich King Croesus, approx. 570 BC. It seems they already had this bull/bear thing going at the time…

Photo via ancientmoney.org – Click to enlarge
It is actually interesting to revisit both past articles speculating about a potential gold bottom that turned out to be correct (those would be the many articles we penned on the topic from August 2015 onward) as well as those that turned out to be incorrect (which would e.g. include a number of articles written in late 2014. Although they managed to catch a playable rally in timely fashion, it ultimately turned out to be a bear market rally).
If you do that you will notice how much more careful we got over time – even when we definitely saw good potential for at least a short term move, we always stressed that the turn might still not be at hand.

Read More »

Inflation Expectations Rise Sharply

November 16, 2016

Mini-Panic Over Inflation After Trump’s Election Victory
We have witnessed truly astonishing short term market conniptions following the Donald Trump’s election victory. In this post we want to focus on one aspect that seems to be exercising people quite a bit at present, namely the recent surge in  inflation expectations reflected in the markets. Will we have to get those WIN buttons out again?
A 1970s “whip inflation now” button. The only thing that was actually needed to “whip inflation” was for the Federal Reserve to stop printing money in ever greater quantities (or to stop supporting rapid money creation by the commercial banking system). It started doing so about 2 years before Mr. Paul Volcker took the helm – true money supply growth began to slow down considerably. Volcker then exacerbated this slowdown and briefly even pushed broad true money supply growth into negative territory. By that time, the decline in price inflation had already gotten underway and the public’s inflationary psychology soon underwent a sea change – right on the eve of one of the strongest increases in manufacturing productivity in modern history.

Read More »

Trumped

November 14, 2016

US Citizens Giving the Finger to Globalist Statist Elites – Big Time
Back in late August we posted something about Mr. Trump’s chances probably being a lot better than was generally assumed (see: US Presidential Election – How Reliable are the Polls?). You know what the say about a headline that ends in a question mark; most often, the answer to the question is “No”. And so it was in this case – the polls were not reliable.
We should point out that Bill Mitchell, the man who showed why the polls were so extremely flawed, is really deserving of a lot of praise in this context. Yes, he may have been a bit biased himself, but he was working all of this out all on his own, and his interpretations of the polls and the forecasts he derived from them managed to beat the pants off every mainstream poll we are aware of.

Yeah baby! He was actually serious with that “we’re going to win it” line.

Photo credit: Reuters – Click to enlarge
At times the polls published by the American and European Pravda Complex, or better the Transatlantic Pravda Complex, almost looked like an orchestrated psy-ops operation. It’s probably more likely though they were just evidence of bias being mistaken for reality and an outsized Bradley effect triggered by the relentless barrage of media attacks on Trump.

Read More »

Dissection of the Long-Term Asset Bubble

November 12, 2016

The Long Term Outlook for the Asset Bubble
Due to strong internals, John Hussman has given the stock market rally since the February low the benefit of the doubt for a while. Lately he has returned to issuing warnings about the market’s potential to deliver a big negative surprise once it runs out of greater fools. In his weekly market missive published on Monday (entitled “Sizing Up the Bubble” – we highly recommend reading it), he presents inter alia the following eye-popping chart:
In terms of the median price-sales ratio the stock market isn’t just overvalued; its valuation is by now beyond good and evil, exceeding every previous bubble peak.  Other measures of valuation are not at similar extremes, but as Mr. Hussman shows in his bubble dissection, this is largely a function of the distribution of valuations across different market capitalization buckets.
The extreme overall market valuation in terms of P/E ratios seen in early 2000 was e.g. skewed by the fact that big cap stocks were the most overvalued sub-sector at the time. Since stock market indexes are capitalization-weighted, overall market valuation was distorted accordingly.

Read More »

Stock Market Volatility, Gold and the Election

November 8, 2016

Pre-Election Market Movers – Mr. Comey and the Trio Infernal
Before this Monday, the S&P 500 Index went down nine days in a row. While this was almost unprecedented (or in any case, a very rare event) the decline was quite small overall. The timing of the pullback and the subsequent strong rebound on Monday suggests that Mr. Comey’s letters to Congress regarding the FBI investigation into official emails by Hillary Clinton – which have found their way unto a computer owned by Anthony Weiner (the former husband of Clinton’s right-hand woman Huma Abedin) –  were the “trigger” for these moves.
 
.
FBI chief Comey and the Trio Infernal: Huma Abedin, Anthony Weiner and Hillary Clinton. Weiner is embroiled in a rather unsavory scandal – allegedly he has inter alia mailed pictures of his unclothed reproductive organs to a minor. The FBI has detected some 650,000 emails on his computer that seem to have come from Ms. Clinton’s private email server, which she in turn used in her official capacity as Secretary of State (her use of this device violated regulations and testified to her lack of sound judgment).

Read More »

Incrementum Advisory Board Meeting Q3 2016

November 6, 2016

Is Stagflation a Potential Threat?
The Incrementum Fund held its quarterly advisory board meeting on October 3 (the transcript can be downloaded below). Our regular participants – the two fund managers Ronald Stoeferle and Mark Valek, advisory board members Jim Rickards, Frank Shostak and yours truly –  were joined by special guest Grant Williams this time. Many of our readers probably know Grant; he is the author of the bi-monthly newsletter “Things That Make You Go Hmmm…”, as well as one of the founders of Real Vision TV.
Characteristics of stagflation: economic growth goes into reverse, but price inflation rises  anyway. This scenario was completely unexpected by the Keynesian consensus when it hit the economy in the 1970s. Keynesian theory ended up discredited for a while as a result. Not surprisingly though, as a theory that provides a “scientific” fig leaf for statism and interventionism, it has been resurrected since then. Today it once again is an important part of mainstream economic orthodoxy; the monetarist school has retained a certain degree of influence as well, but its policy prescriptions are just as misguided in our opinion.

Read More »